The SA construction sector — foundation for growth

South Africa's construction industry has endured a bruising decade. Gross fixed capital formation — a key measure of infrastructure investment — lingers at record lows. The construction sector once teemed with giants like Murray & Roberts, Group Five, Aveng, Basil Read and WBHO. Portfolio manager NANCY HOSSACK takes a closer look at the sector and the last man standing: WBHO.

Despite the prevailing economic gloom, in late 2022 we saw compelling reasons to buy WBHO as a standout investment opportunity. This might appear counterintuitive, since construction activity in South Africa has been sluggish due to weak public infrastructure spending and a post-COVID hangover in private sector development. However, what seems like a dire situation masks a powerful competitive advantage for WBHO. With so few remaining large-scale players, the industry has become less crowded, more stable, and potentially more profitable for the survivors.

A defining feature of major construction contracts is the requirement for performance guarantees. Performance guarantees are issued by banks or insurers to protect clients from default by contractors. They can only be backed by firms with sizable balance sheets, and act as a significant barrier to entry. With the departure of many of its rivals, WBHO now finds itself in a dominant position. With fewer competitors, it can command better pricing and can cherry pick projects with stronger risk-reward profiles.

The order books and earnings potential for WBHO and its smaller peer Raubex suggest solid growth. These companies are seeing an uptick in activity, driven by early signs of improved public infrastructure spend and growing private sector investment in energy projects. Even from a historically low base, this trend is meaningful — and WBHO’s operational performance already reflects these shifts.

What makes the WBHO investment case particularly interesting is the combination of a cleaner, more focused business following its exit from Australia, a strong balance sheet, and an upside potential that the market seems to be ignoring. 

WBHO historically operated in four key geographies: South Africa, Africa, Australia, and, more recently, the UK. Over the last decade, as South African growth slowed, WBHO — like many of its peers — externalised its operations. While its South African and African operations showed steady but modest growth, Australia initially provided a high-growth story. However, this came with costly lessons.

WBHO’s recent exit from the Australian market followed a period of aggressive pricing and several problem contracts, which led to significant losses — its first in over five decades. The business has since been wound down, with settlement agreements reached with creditors. While a final resolution on one major project remains outstanding, the financial risk is now well-contained.

This exit has restored stability to WBHO’s financial position. The company now boasts a healthier balance sheet and is better positioned to pursue growth opportunities at home and abroad. In the UK it has adopted a risk-averse approach, focusing on careful procurement and margin improvement.

Foord’s investment thesis is built on this new foundation. The construction environment in South Africa may still be subdued, but WBHO is uniquely positioned to benefit from a recovery. Government-led infrastructure projects and increased private sector energy investment are expected to provide a tailwind. With fewer credible competitors, WBHO is well placed to win and execute these large-scale projects.

Despite a sizzling 2024 share price performance — the share was up 73% — the market is still not yet priced in the potential upside. WBHO is a business with solid fundamentals, strong barriers to entry, and a skewed risk-reward profile that favours patient investors.

While South Africa’s construction sector continues to face macroeconomic headwinds, WBHO stands out as a survivor with a rapidly growing order book and pipeline. In a sector where few remain, that resilience and positioning may prove to be a valuable long-term asset.